Republican lawmakers in the Ohio House of Representatives have proposed a tax increase on oil and gas production in the state, focusing specifically on wells using “horizontal drilling“ in conjunction with hydraulic fracturing to extract oil and natural gas from Ohio’s shale deposits.

The bill—HB 375—would impose a 1 percent “severance” tax on horizontally drilled and stimulated (e.g., hydraulically fractured) wells during the first five years of production, with the potential to rise to 2 percent for wells producing at a high volume. The proposal would offset some of the increased tax burden for the oil and gas industry by creating a new exemption to Ohio’s commercial-activities tax and instituting income-tax credits for anyone responsible for paying the new “severance” tax.

Unlike horizontal drilling, conventional drilling techniques—used by most Ohio-based oil and gas companies—will not be subject to a tax increase, putting much of the additional tax burden on out-of-state producers.

HB 375 comes several months after GOP leaders refused to pass a similar tax increase proposed by Governor John Kasich as part of his two-year budget plan. Kasich’s proposal would have taxed production at 1.5 percent of gross sales, with the potential to rise as high as 4 percent after producers had recovered their startup costs.

The bill’s sponsor, Ohio House Speaker Pro Tempore Matt Huffman, estimated that the tax will raise approximately $1.7 billion over 10 years, compared to the $2.8 billion estimated for Governor Kasich’s proposal. The law would require that the additional revenue be used to: (1) fund regulatory efforts in the oil and gas industry; (2) clean up Ohio’s more than 5,000 idle or “orphan” wells; or (3) fund statewide cuts in income taxes.

The bill received immediate support from Republican leadership, including Ohio House Speaker William Batchelder, Representative David Hall (chair of the Agriculture and Nature Resources Committee), Representative Cheryl Grossman (Majority Whip), Representative Ron Amstutz (chair of the House Finance Committee), and numerous other Republican House leaders and committee chairs, all of whom are also co-sponsors of the bill.

News coverage of the proposed legislation can be found here and here, and the full text of the bill is available here. We will be preparing a more detailed analysis of the Bill and will post it on this blog in the near future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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